Lower US economic growth forecasts dampen prospects in commercial real estate

Lower US economic growth forecasts - indicating that the recovery could be weaker than had been anticipated - are dampening prospects in many sectors, including commercial real estate, said an article recently published by financial services company Standard & Poor's (S&P) entitled "Economic Uncertainty Continues To Hammer Commercial Construction."
 
According to S&P's chief economist David Wyss, commercial construction spending in the US will drop 14 percent in 2010, with no growth likely until 2012. "Non-residential construction spending plunged 20 percent in 2009, in response to high vacancy rates and tough financing conditions, though this was somewhat less than we feared last year," he added.
 
The report revealed that commercial construction starts in the US plunged 24 percent to $419 billion in 2009, the largest percentage drop in the past 50 years. Non-residential building fell 30 percent in value and 44 percent in area. Public works projects held steady in dollar volume, largely as a result of federal stimulus funding, especially for the transportation sector.
 
"Financial markets are constraining development," said Mr. Wyss. "Loans are more expensive and harder to get than they were during the property boom of five years ago, although conditions have improved dramatically since the freeze of early 2009," he added.
 
Offices are the largest component of commercial construction in dollar terms, and they are usually the most cyclical, according to the report. This time, however, offices have been hit less hard than other sectors. The peak apparently came before developers managed to overbuild as much as they did in the past, the report said.
 
"We are expecting office construction starts to drop another 23 percent this year in terms of area. By 2011, an improving employment market and declining vacancies should enable construction to stabilize. The decline will not be as long as the downturn after the 1991 recession, in our view, but it will still be painful," Mr. Wyss concluded.